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Federal Reserve Updates Requirements for Processing FOIA Requests
On October 19, the Federal Reserve Board finalized amendments to regulations for the processing of Freedom of Information Act (FOIA) requests by the Board. The amendments (i) “clarify and update procedures for requesting information from the Federal Reserve Board”; (ii) “extend the deadline for administrative appeals”; and (iii) “add information on dispute resolution services.”
The Board published the final rule in the Federal Register on October 25; the rule will become effective on November 24 of this year.
CFPB Issues Final Rule Regarding Payday, Title, Deposit Advance, and Other Installment Loans
On October 5, the CFPB published its final rule (Rule) addressing payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans (collectively, “covered loans”). The CFPB previously announced the proposed rule in June 2016 (covered by a Buckley Sandler Special Alert). The final rule makes it an abusive and unfair practice for lenders to make a covered short-term loan or covered longer-term balloon loan without determining upfront that the borrower has the ability to repay (known as the “full-payment test”). The full-payment test varies depending on the covered loan, but in essence, requires the lender to reasonably determine that the borrower can meet basic living expenses and major financial obligations and still afford their highest monthly payment(s). The Rule puts a limitation of three on the number of loans that can be made in quick succession (within 30 days of each other).
Lenders may avoid the requirement of a “full-payment test” with covered loans by offering small-dollar, short-term loans that allow the borrower to pay down the principal more gradually or are determined to pose less financial risk to the borrower. In addition, loans that meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration are excluded, as are no-cost advances and wage advance programs that meet certain conditions, though the Rule does impose restrictions on using these exceptions based on the borrower’s loan history.
In addition to requirements surrounding the borrower’s ability to repay, the CFPB also finalized rules regarding payment withdrawals and reporting requirements. The Rule prevents lenders from attempting to withdraw a payment from a borrower’s account after two consecutive withdrawal attempts have failed, unless the borrower has given specific authorization to do so. This restriction applies to covered loans as well as longer-term loans with account access and an APR above 36 percent. The Rule requires lenders to use Bureau-registered credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option.
The provision regarding the registration information systems takes effect 60 days after publication in the Federal Register. The rest of the Rule takes effect 21 months after publication in the Federal Register.
Buckley Sandler will follow up with a more detailed summary of the CFPB’s final rule.
CFPB Issues Interim Final Rule Regarding Foreclosure Communications; Seeks Comment on Proposed Rule About Periodic Statements During Bankruptcy
On October 4, the CFPB announced one change and one proposed change to the amendments to its mortgage servicing rules under Regulations X and Z. These amendments, which were previously covered by a Buckley Sandler Special Alert, are scheduled to take effect in two phases on October 19, 2017 and April 19, 2018.
First, the CFPB amended the amendments to Regulation X’s provision regarding early intervention notices in order to address timing issues that result when a borrower has invoked his or her cease in communication rights under the FDCPA. Had the most recent amendment not been made, a mortgage servicer subject to a cease in communication request would have been required to provide a modified early intervention notice to the borrower every 180 days but not more than once during any 180-day period, leaving no margin for error and creating operational challenges if the 180th day fell on a weekend or holiday. Based on concerns from the mortgage industry the CFPB issued an interim final rule without advance public comment to give servicers a 10-day window to provide the modified notices at the end of the 180-day period. The interim final rule becomes effective on October 19, 2017, at the same time the broader amendments to the early intervention requirements take effect.
Second, the CFPB proposed to update technical aspects of the upcoming periodic statement requirements for borrowers in bankruptcy. Specifically, the CFPB is seeking public comment on changes to the transition rules for borrowers who enter or leave bankruptcy, including replacing the single-billing-cycle exemption with a single-statement exemption for the next periodic statement the servicer would have to provide regardless of when in the billing cycle a triggering event occurs. The Bureau proposed that these amendments take effect on April 19, 2018, at the same time as the new periodic statement requirements for borrowers in bankruptcy.
The comment period on both the interview final rule and the proposed rule will close 30 days after publication in the Federal Register.
Federal Banking Regulatory Agencies Issue Proposed Rulemaking to Simplify Regulatory Capital Rule
On September 27, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a joint notice of proposed rulemaking to simplify capital rule compliance requirements and reduce the regulatory burden in accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Among other things, the proposed rule will “apply a simpler regulatory capital treatment” for mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties, or minority interest. To assist banks in evaluating the potential impact of the proposal, the agencies provided an estimation tool template and summary of the proposal. As previously discussed in InfoBytes, the agencies—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a report in March following an EGRPRA review, in which the agencies outlined initiatives designed to reduce regulatory burdens, particularly on community banks and savings associations. In a statement issued by FDIC Chairman Martin J. Gruenberg, commenters are encouraged to also consider methods for simplifying existing regulatory capital rules impacting community banks. Comments on the joint proposed rule are due 60 days after publication in the Federal Register.
CFPB Publishes Final Rule Amending Annual Dollar Threshold in TILA Regulations
On August 30, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank ability-to-repay and qualified mortgage provisions (ATR/QM). The CFPB is required to make adjustments to dollar amounts in the Regulation Z provisions implementing these laws based on the annual percentage change reflected in the Consumer Price Index effective June 1, 2017. For open-end consumer credit plans under TILA, the minimum interest charge disclosure threshold will remain unchanged at $1.00 in 2018. For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will remain unchanged at $27 in 2018, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will remain unchanged at $38 in 2018. For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages in 2018 will increase to $21,032, and the adjusted points and fees dollar trigger for high-cost mortgages in 2018 will be $1,052. To satisfy the underwriting requirements under the ATR/QM rule, the maximum thresholds for total points and fees for qualified mortgages in 2018 will be: (i) 3 percent of the total loan amount for loans greater than or equal to $105,158; (ii) $3,155 for loan amounts greater than or equal to $63,095 but less than $105,158; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,032 but less than $63,095; (iv) $1,052 for loan amounts greater than or equal to $13,145 but less than $21,032; and (v) 8 percent of the total loan amount for loan amounts less than $13,145. The final rule is effective January 1, 2018.
Federal Reserve Board Amends Policy on Payment System Risk
On August 25, the Board of Governors of the Federal Reserve System (Board) published in the Federal Register an amendment to Part II of its Policy on Payment System Risk (PSR Policy) in order to “conform to enhancements to the Reserve Banks’ same-day automated clearinghouse (ACH) service.” Posting rules set forth in the PSR Policy govern the times that credits and debits are posted to institutions’ accounts at the Federal Reserve Banks and determine an institution’s intraday account balance and whether the institution has incurred a negative balance (i.e., a “daylight overdraft”).
Changes to the PSR Policy include the following:
- An ACH derived returns function to enable institutions to generate returns via FedLine Web using information from the forward ACH items received through FedACH. The function is intended for institutions that lack the ability to generate returns on their own. Because the derived returns function uses information not available until the day after the processing day for forward ACH items, the Reserve Banks will provide users of the function an interim solution: a same-day paper return option for same-day forward entries greater than $10,000.
- Clarification of posting times for paper returns and paper notifications of change of prior-dated items. Because these items are manually processed by Reserve Bank staff during normal business hours, the Board has announced that posting will now only occur at 5:00 p.m. The PSR Policy has been modified to remove the 8:30 a.m. posting time. However, depending on when the Reserve Banks receive FedLine Webs returns and FedLine Web notifications of change, these items will continue to be posted at 8:30 a.m. and 5:00 p.m.
Details regarding amendments to the “Procedures for Measuring Daylight Overdrafts,” including specific details corresponding to the 8:30 a.m., 1:00 p.m., and 5:30 p.m. transaction posting times, are also included in the Board’s policy statement.
HUD Releases Mortgagee Letter Providing Home Equity Conversion Mortgage Servicing Implementation Guidance
On August 24, HUD published Mortgagee Letter 2017-11, which provides directions for FHA-approved mortgagees to implement certain servicing policy changes outlined in the Federal Housing Administration: Strengthening the Home Equity Conversion Mortgage Program Final Rule (HECM Final Rule), published in the Federal Register in January 2017. The HECM Final Rule’s servicing requirements (including the additional guidance set forth in Mortgagee Letter 2017-11), will take effect for all FHA case numbers assigned on or after September 19, 2017. The Mortgagee Letter furnishes additional details on the following areas of servicing policy included in the HECM Final Rule: (i) “Default for Unpaid Property Charges”; (ii) “Sale of Property Securing a Due and Payable HECM”; and (iii) “Cash for Keys Incentive and Relocation Incentive.”
NCUA Seeks Comments on Comprehensive Regulatory Reform Agenda
On August 16, the National Credit Union Association (NCUA) announced plans to publish in the Federal Register a notice requesting comments on its four-year regulatory reform agenda. As an independent agency, the NCUA is not required to comply with President Trump’s Executive Order 13777, which compels agencies to review and carry out regulatory reform, but it chose to voluntarily comply with the spirit of this Order by forming an internal regulatory reform task force to determine if any of the agency’s existing regulations should be eliminated, revised, improved, or clarified. The Task Force Report outlines its initial findings and recommendations for the amendment or repeal of regulatory requirements that it has determined are outdated, ineffective, or excessively burdensome. The report provides a three-tiered prioritization approach to regulatory reform based on “degree of impact and degree of effort” covering a four-year period, where “impact” focuses on the “magnitude of the benefit that would result from the change, and how broadly the stakeholder community would be impacted”, and “effort” considers the time and energy required to make the change.
Tier 1 recommendations, assigned the highest level of priority with a two year target time frame, address the following key recommendations: (i) revisions to the “loans to members and lines of credit to members” rules, which govern federal credit union loan maturity limits, single borrower limits, third-party servicing of indirect vehicle loans and executive compensation plans; (ii) modernization of the federal credit union bylaws; (iii) revisions to the agency’s chartering and field of membership manual; (iv) potential changes to capital planning and stress test threshold requirements; and (v) implementation of certain fidelity bond and insurance coverage requirements.
Tier 2 recommendations, which provide a three-year target time frame, address the following key recommendations: (i) revisions to aggregate loan participation limits; (ii) conducting a review to determine whether prior NCUA approval is required to purchase and assume liabilities from market participants other than federal credit unions; and (iii) easing restrictions on investment activities not required by the Federal Credit Union Act.
Tier 3 recommendations, which provide a four-year target time frame, address the following key recommendations: (i) enhanced third-party due diligence rules; (ii) changes concerning loans and credit lines to members to “[e]nhance Federal preemption where possible and appropriate” in an effort to reduce overlap with state laws and regulatory burden; and (ii) conducting a review of the regulation pertaining to security programs, suspected crimes and transactions reporting, catastrophic acts, and Bank Secrecy Act compliance.
Comments on the proposed plan are due 90 days after publication in the Federal Register.
Amendments and Proposal to TRID Rule Published in Federal Register, Comments Due October 10
As previously reported in a Special Alert, the CFPB issued amendments to its TILA/RESPA Integrated Disclosure rule, which importantly included a concurrent proposal to address the “black hole” issue that prevents creditors from resetting tolerances using the Closing Disclosure except in very limited circumstances. On August 11, the Bureau published the amendments in a final rule and the proposal in the Federal Register. The final rule takes effect October 10, 2017 with mandatory compliance by October 1, 2018. Comments on the proposal are due October 10, 2017.
Federal Reserve Issues Guidance Regarding Roles of Bank Boards, Requests Comments on New SIFI Rating System
Guidance Regarding Roles of Bank Boards.
On August 3, the Federal Reserve (Fed) took an important step towards easing the heavy regulatory burden placed on the boards of directors at the largest U.S. banking organizations, when it issued for public comment a corporate governance proposal intended to “enhance the effectiveness of boards of directors” and “refocus the Federal Reserve supervisory expectations for the largest firms’ boards of directors on their core responsibilities, which will promote the safety and soundness of the firms.”
The proposal is a result of a multi-year review conducted by the Fed of practices of boards of directors, particularly at the largest banking institutions. The Fed focused on the challenges boards face, the factors that make boards effective, and the ways in which boards influence the safety and soundness of their firms and promote compliance within. The key takeaways of this review included:
- supervisory expectations for boards of directors and senior management have become increasingly difficult to distinguish;
- boards devote a significant amount of time satisfying supervisory expectations that do not directly relate to board’s core responsibilities; and
- boards of large financial institutions face significant information flow challenges, which can result in boards being overwhelmed by the complexity and quantity of information received.
The Fed expects that these issues can be remediated by allowing banks to refocus on their core responsibilities, including: (i) developing the firm’s strategy and risk tolerance; (ii) overseeing senior management and holding them accountable for effective risk management and compliance; (iii) supporting the independence of the firm’s independent risk management and internal audit functions; and (iv) adopting effective governance practices.
In April, Fed Governor Jerome Powell indicated that the financial crisis led to a “broad increase in supervisory expectations” for these boards of directors, but cautioned that the Fed needs to “ensure that directors are not distracted from conducting their key functions by overly detailed checklist of supervisory process requirements.” Explaining that the Fed was reassessing its supervisory expectations for boards, Powell stated “it is important to acknowledge that the board’s role is one of oversight, not management.”
The proposed guidance better distinguishes the supervisory expectations for boards from those of senior management, and includes new criteria by which the Fed will assess bank boards. The Fed describes effective boards as those which:
- set clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance;
- actively manage information flow and board discussions;
- hold senior management accountable;
- support the independence and stature of independent risk management and internal audit; and
- maintain a capable board composition and governance structure.
The proposal also clarifies expectations regarding internal communications within firms for communicating supervisory findings internally, stating that for all supervised firms, most supervisory findings should be communicated to the firm's senior management for corrective action, rather than to its board of directors. Such findings would only be directed to the board for corrective action when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action.
While the proposal does not address all of the post-crisis challenges faced by bank boards, it is a welcome message to the industry that the Fed recognized the need to recalibrate their expectations. The proposal also identifies existing supervisory expectations for boards of directors that could be eliminated or revised and notes that the Fed intends to continue assessing whether its expectations of bank boards require further changes.
New SIFI Rating System.
On August 3, the Fed also issued for public comment a new risk rating system for Large Financial Institutions (“LFI”s) that would replace the RFI rating system for bank holding companies with total consolidated assets of $50 billion or more; non-insurance, non-commercial savings and loan holding companies with total consolidated assets of $50 billion or more; and U.S. intermediate holding companies of foreign banking organizations established pursuant to the Fed’s Regulation YY. (The Fed will continue to use the same RFI rating system that has been in place since 2004 to evaluate community and regional bank holding companies.)
The LFI rating system is designed to evaluate LFIs on whether they possess sufficient financial and operational strength and resilience to maintain safe and sound operations through a range of conditions. The system would consist of three chief components:
- Governance and Controls
- board of directors
- management of core business lines and independent risk management and controls and
- recovery planning (for domestic bank holding companies subject to LISCC);
- Capital Planning and Positions; and
- Liquidity Risk Management and Positions.
The Governance and Control component would evaluate a LFI’s effectiveness in ensuring that the firm’s strategic business objectives are safely within the firm’s risk tolerance and ability to manage the accordant risk. The component will focus on LFIs’ effectiveness in maintaining strong, effective and independent risk management and control functions, including internal audit and compliance, and providing for ongoing resiliency.
The second and third components are intended to incorporate LFI supervision activities, including CCAR and CLAR, which will be directly reflected within the respective component ratings–resulting in a more comprehensive supervisory approach than the RFI rating system which did not incorporate the results of those supervisory activities.
Each LFI would receive a component rating using a multi-level scale (Satisfactory/Satisfactory Watch, Deficient-1 and Deficient-2). “Satisfactory Watch” would indicate that a firm is generally considered safe and sound, however certain issues require timely resolution. Any Deficiency rating would result in that LFI being considered less than “well managed.”